Q: Can I consolidate different IRAs into one FAM IRA?
A: Yes, but there are considerations. There are two types of IRAs – Traditional and Roth. For example, Traditional includes Rollover and Spousal IRAs which can be consolidated (rolled over), even from different companies, into one FAM Traditional IRA. Roth IRAs may also be combined including Roth 401(k)s.

Rolling over separate retirement accounts of the same type into one at FAM is an option you should consider. Some of the benefits include: tax-free consolidation of the accounts, fewer statements, time savings, and less potential for confusion. For example, miscalculating a Required Minimum Distribution (RMD) may lead to a 50% IRS penalty tax. Also, FAM does not charge annual maintenance fees (No-Fee) on its IRA accounts – thus reducing out-of-pocket costs.

However, there are circumstances when it may not be wise to consolidate retirement accounts. For instance, to avoid a mandatory federal income tax withholding, investors with a qualified retirement plan such as a 401(k) should make sure that a “direct” rollover option is available before consolidating. This way the account owner does not receive the assets and they usually retain their tax-deferred status because the distribution check is payable to the IRA’s custodian or trustee.

We make it easy to roll over your retirement accounts into a FAM Funds No-Fee IRA. There are more details to consider and IRA consolidation is not right for everyone, so please call me at 800-453-4392, option 2 or e-mail sweetser@famfunds.com to discuss your situation. As always, I recommend including your accountant or tax preparer in the final decision.

Q: What are the possible tax consequences for withdrawing money from my IRA?
A: There are several items to consider before taking a distribution from a tax-deferred account such as a Traditional or Roth IRA. First, a Traditional (“deductible”) IRA withdrawal is considered ordinary income. Typically, the entire distribution is taxed as ordinary income. Distributions to shareholders younger than 59½ may also be subject to a 10% IRS penalty unless an exception applies. Second, a Roth distribution is tax-free if you have met the necessary requirements like owning the account for five or more years and being 59½ or older. Please note: if you take money from a regular (taxable) non-retirement account, such as a single or joint account, you may be subject to capital gains taxes.

Let’s say you need $5,000 to take a vacation. If you withdraw it from the Traditional IRA and you’re in a 30% tax bracket, you would incur $1,500 in taxes. However, the Roth distribution could be tax-free. Meanwhile, your taxable single or joint account may be subject to capital gains tax on proceeds above your original cost at rates ranging from 0% to a maximum of 15% for long-term gains. Each scenario has different tax ramifications and your decision should be based upon your situation at any given time.

Due to the complex IRA distribution rules, one size does not fit all so please call me at 800-932-3271 or e-mail sweetser@famfunds.com to discuss what might be right for you. As always, I recommend including your accountant or tax preparer before you make a transaction.

Q: How does an IRA Qualified Charitable Distribution work?
A: It’s remarkable how generous Americans are in donating money to countless charities in our communities. It’s also nice when these contributions are not taxed. An IRA Qualified Charitable Distribution (or IRA Charitable Rollover) is an alternative way you can also give to your favorite charity without paying income tax.

Here’s how it works. First, to be eligible, the account holder or beneficiary must be at least 70½ years old. Second, a qualified charitable distribution can only be made from a Traditional or Roth IRA. Third, each individual can donate up to $100,000 per year to one or more qualified charitable organizations.

Unlike a typical IRA distribution, no income tax is paid. Please note – the taxpayer cannot take the contribution as a charitable deduction on their Federal Income Tax return. However, the donation can be counted as all or a portion of one’s IRA required minimum distribution. Additionally, if there is any uncertainty, it’s a good idea to confirm with the organization that it is qualified to accept charitable contributions for tax purposes. 

Q: I understand that for 2010 there is a provision that allows for the conversion of a Traditional IRA to a Roth IRA without income limits. Can you shed some light on this?
A: Beginning January 1, 2010, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) allows for the conversion of a Traditional IRA to a Roth IRA without any income restrictions. This is significant, particularly for those with a modified adjusted gross income (MAGI) greater than $100,000 who previously were excluded from many Roth IRA benefits. It’s also very compelling to convert a non-deductible IRA. However, there are a few important points to consider before converting.

The most important one is taxes. Any conversion amount is a taxable event that will add to your taxable income. If you convert in 2010, you may spread the tax over two years – 2011 and 2012. Conversions outside 2010 require all taxes to be paid the next year. Further considerations include assessing whether your tax rate will be higher or lower when you retire than it is now. Also, what will be your funding source for tax payments? If your retirement account is the only fund for your taxes, you may want to think long and hard before making a conversion despite many of the benefits.

Please remember that you can convert any Traditional IRA from another company into a No-Fee FAM Funds Roth IRA. As always, I highly recommend including your accountant or tax preparer in the final decision!

Q: I want to rollover my 401(k) plan to FAM Funds. My employer is offering me early retirement next year when I turn 55. The company told me that I can take the distribution as a lump sum. Do you have a recommendation? Are there any issues I should be aware of?
A: Yes. A direct rollover of a 401(k) to a FAM Funds Traditional IRA is a nice option because it allows you to avoid both the 10% early distribution penalty and any federal income tax. However, if you take money from your IRA before 59 ½, with a few exceptions, you will incur the 10% early distribution penalty. So, if your intent is to move your 401(k) into an IRA and not touch it until you’re in your sixties, then a direct rollover is a valid option.

Q: Given the current market conditions, is now a good time to convert my Traditional IRA into a Roth IRA?
A: First, a conversion is when you move assets from a Traditional IRA into a Roth IRA; it is an intentional, taxable event. When you take advantage of this option, you pay income taxes today on 100% of the pre-tax dollars you convert. Once the taxes are paid, income taxes may never be due on appreciation or subsequent withdrawals. I say “may” because certain requirements must be met to maintain the tax-free status. This includes not touching the assets for five years from the conversion date along with one of four other criteria.

Second, a conversion may not be right for everyone, but everyone who is eligible should understand its benefits. A silver lining resulting from the market downturn is that since your account may have declined in value, you pay taxes on a lower amount now instead of on a larger amount later. One of the limitations is that if your modified adjusted gross income (MAGI) is greater than $100,000, you cannot convert.

There are more details to consider so please contact us to discuss converting to a FAM Funds Roth IRA. We recommend including your accountant or tax preparer in the final decision.

Q: Is a 2008 IRA contribution made via mail and postmarked on or by April 15, 2009, but received after that date, considered on-time?
A: Yes, under IRC Sec. 7502(a) any payment that must be made by a specific date under IRS laws and is delivered by the U.S. Postal Service after the date, is deemed made on the postmarked date. It is recommended that financial organizations accepting contributions after the deadline — Place the envelope bearing the postmark in the investor’s file; Contact the customer to confirm the tax year for the contribution.

Q: May Traditional IRA contributions be made after age 70½?
A: Yes, in three instances — When an employer funds a SEP they must contribute for eligible employees over 70½; When accepting qualified transfers or rollovers. However, you should not rollover required minimum distributions; When making carry back contributions (made between January 1 and April 15 of the previous tax year) provided you are eligible to do so.

Q: Is there an income requirement for making Traditional IRA contributions?
A: Basically, a person just needs earned income from personal services rendered to meet the requirement. The IRS defines this as any amount listed in the Form W-2 (Wage and Tax Statement) “Wages, Tips, Other Compensation” box less the total shown in the “Nonqualified Plans” box. Please Note: IRA Publication 590 indicates that taxable alimony and separate maintenance payments are also eligible for contributions.

Q: How many Traditional IRAs may a person have?
A: An investor may have more than one Traditional IRA, but once they sign one set of opening documents and make subsequent contributions under the same plan agreement, only one Traditional IRA exists. If an individual has multiple IRAs, they must combine annual contributions to monitor specified maximum yearly contribution limits.

Q: May a self-employed IRA investor contribute to a Traditional IRA if they also contribute to a SEP?
A: Yes, if they are under age 70½ and have eligible earned income. Please Note: Contributing to a SEP makes the person an active participant in an employer-maintained retirement plan during those contribution years. Consequently, the IRA contribution may not be fully deductible depending upon the investor’s modified adjusted gross income (MAGI).

Q: How often should I review my IRA beneficiaries?
A: You should review both your primary and contingent IRA beneficiaries annually. Perhaps you have had changes in your relationships such as a wedding, the death of a loved one, or a divorce. As the IRA distribution process occurs following your death, if the primary beneficiary is alive, your account will go to them. If your primary beneficiary predeceases you, the IRA is distributed to the contingent beneficiary. If you have not assigned a contingent beneficiary, then it goes to your estate.

If your situation has changed, there may be unintended consequences from your beneficiary designations. For example, your IRA could be paid to your ex-spouse or current spouse instead of your children. Also, a later born child may not be named as a beneficiary. Additionally, there can be negative tax consequences if your IRA goes to your estate instead of your spouse or other beneficiaries. Please Note – This applies to these retirement accounts: Traditional, Roth, SEP, SIMPLE, Individual(k), and 403(b)(7).

Q: How can I change the beneficiary on my IRA?
A: To change the beneficiary designation on your retirement account, you must complete a Change of Beneficiary Form and return the form to our office. Change of Beneficiary Forms can be accessed under Shareholder Services – Applications & Forms.

Q: May an active participant in an employer-sponsored Qualified Retirement Plan (QRP) make a Traditional IRA regular contribution?
A: Yes, if they are younger than 70½ and have earned income. However, an investor’s status as an active participant in a QRP, such as a 401(k), may limit the tax deduction from the Traditional IRA contribution. A person’s Form 1040 tax filing status and modified adjusted gross income (MAGI) factor into determining the deduction.

Q: May a person with an IRA title their account in the name of their living trust?
A: No, IRAs are only for an individual’s benefit. An IRA is a person’s trust with a financial organization typically acting as the trustee of their assets. However, a living trust may be named as the beneficiary and upon death of the holder the IRA is paid into the trust and the assets are distributed according to the provisions.